Is Retail Sector's Momentum Sustainable?

The Q1 earnings season has effectively come to an end for most of the major sectors, with the Retail sector as the only one that has a significant number of reports still awaited. While the overall earnings picture is quite weak, with not much growth and estimates for the current period coming down, the Retail sector has had fairly good run thus far in the Q1 earnings season.

With a number of retailers like Macy`s Inc (NYSE:M), Nordstrom Inc (NYSE:JWN) and others reporting results this week, it will be interesting to see if the sector can maintain the performance momentum it has shown thus far. In total, we have more than 400 companies reporting results this week, including 15 S&P 500 members. By the end of this week, we will have seen Q1 results from 93% of the S&P 500 members.

Retail Sector Scorecard

As of Friday February May 8th, we have seen Q1 results from 22 retailers in the S&P 500 index (out of the 42 total) that combined account for 55.7% of the sector’s total market cap in the index. Total earnings for these 22 retails are up +7.5% from the same period last year, on +11.7% higher revenues, with 90.9% beating EPS estimates and 54.5% coming ahead of top-line expectations.

This is better performance than we have seen from these 22 retailers in other recent periods, as the comparison chart below shows. Importantly, the sector’s earnings beat ratio is currently the highest of all 16 sectors and its revenue beat ratio is the second highest (second only to Medical).

The charts above compare the sector’s results thus far with what these same 22 retailers reported over the past year. As you can see, the earnings growth rate (+7.5%) is better than what we saw from the same group of companies in 2014 Q4 (+2.9%) and the 4-qurater average (+4%). The +11.7% revenue growth rate for the sector is the highest in the S&P 500 index, though the growth rate drops to a still high +8% once the easy comparisons at Walgreens Boots (NASDAQ:WBA) are adjusted. And as referred to earlier, the sector’s earnings and revenue beat ratios are materially better than what we seen for the broader index as a whole.

Retail sector stocks have been strong performers lately, with sector stocks in the S&P 500 handily outperforming the broader index in both the year-to-date and trailing 52-weeks as well as in response to the results that have come out already. In fact, the stock price reaction to Q1 earnings announcements is the highest of all 16 sectors in the S&P 500 for the Retail sector (see second last column in Figure 1 below). This could change in the coming days as more retailers report results. But at this stage at least, the Retail sector stands for its earnings and stock price performance.

2015 Q1 Earnings Scorecard (as of May 8th, 2015)

We now have Q1 result from 448 S&P 500 members that combined account for 91.3% of the index’s total market capitalization. Total earnings for these companies are up +2.1% on -4.2% lower revenues, with 66.0% beating EPS estimates and 43.8% coming ahead of revenue expectations.

Figure 1 below shows the current Scorecard for the 448 index members that have reported results.

Figure 1: 2015 Q1 Scorecard (as of 5/08/2015)

Please note that the second-last column (Price Impact) in the Scorecard table above tries to capture how stock prices have moved in response to earning releases. As the small note at the bottom of the table explains, the price change is from the day before the earnings announcement to the day after. If we are looking at a stock that has reported that morning, then the day before price is compared to the intraday price on the release date. As mentioned earlier, the Retail sector stands out for its strong stock price response to earnings results.

Putting Q1 Results in Context

Figure 2 below shows the comparison of the results thus far with what we have been seeing from the same group of 448 companies in other recent quarters.

Figure 2: 2015 Q1 Results Compared

The left-hand side chart compares the earnings and revenue growth rates for these 448 S&P 500 members with what these same companies reported in the preceding quarter and the average growth rates for these companies in the preceding four quarters (the 4-quarter average is through 2014 Q4). The right-hand side chart does the same comparison for these S&P 500 members, but compares only the earnings and beat ratios.

Here are the takeaways from looking at this chart

1. The earnings growth rate (+2.1%) is decent enough, but is weaker relative to other recent periods. The earnings growth comparison becomes extremely lopsided once the Finance sector’s strong growth numbers are excluded (more on that a little later).
2. The revenue growth rate (-4.2%) is notably below what we saw from this group of companies in Q4 (+1.2%) as well as in the 4-quarter average (+3.2%).
3. The earnings beat ratio is tad bit below what we have been seeing in the recent past, but not in a big way.
4. The revenue beat ratio is notably below what these same companies reported in the preceding as well as 4-quarter average.

The Finance Effect

Total earnings for the Finance sector (all results for the sector are on the books now) are up +16.5% on +2.0% higher revenues, with 63.9% beating EPS estimates and 49.4% coming ahead of top-line expectations. This is better growth performance than we have seen from this group of Finance sector companies in other recent quarters and plays a material role in holding up the aggregate growth picture for the S&P 500. Excluding the Finance sector, total earnings for the remaining index members would be down -1.6%.

Figure 3 below compares the S&P 500 results thus far with and without the Finance sector.

Not to make light of the Finance sector’s better looking numbers this quarter, but the sector’s growth pace did benefit from easy comparisons for Bank of America (NYSE:BAC). Exclude Bank of America and the earnings growth rate drops to +9.1%. But even this +9.1% growth rate compares favorably to what we have been seeing from this group in other recent quarters.

The Oil Effect

The Energy sector results have come in better than expected – the growth rates are all negative, but they aren’t as bad as initially feared. With all of the Energy sector results on the books, total earnings for the sector are down -54.2% on -34.7% lower revenues, with 70.7% beating EPS estimates and 46.3% coming ahead of top-line estimates.

Excluding the Energy sector, the aggregate growth picture for the S&P 500 become notably better, with total earnings for the index up +10.6% on +1.9% higher revenues. The chart below looks at the aggregate picture while excluding both the Energy and Finance sectors. As you can see, the growth comparison still remains unfavorable (right-hand side chart).

The Composite Picture for Q1

Figure 5 below presents the composite summary picture for Q1 contrasted with what companies actually reported in the 2014 Q4 earnings season. What this means is that the data below is presenting Q1 as a whole, combining the actual results from the 448 S&P 500 members that have reported results with estimates from the still-to-come 52 companies.

Figure 5 – The Composite Summary Picture

As you can see in the above summary table, total Q1 earnings are expected to be up +2.2% from the same period last year on -3.1% lower revenues, with Finance as a big boost and Energy as major drag on the growth rate. Excluding the Finance sector, total earnings in Q1 would be down -1.2% on -3.9% lower revenues. Excluding Energy, total earnings for the remainder of the S&P 500 index would be up a decent enough +4.5% on +2.1% revenue growth.

Among the major sectors, Transportation, and Autos are big growth contributors this quarter, with Transportation earnings expected to be up +38.8%, Autos earnings up +26.4%, Medical up +20.7%, and Finance up +16.5%.

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